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David Hurwitz – CEO, Transaction Capital

Transaction Capital generates 18% growth in continuing headline earnings per share

SIKI MGABADELI: Transaction Capital has reported continuing headline earnings increasing 17% to R330m for the year to end September. The groups non-performing loan ratio improved by 11% to 25.7% and Transaction Capital declaring a dividend of 10 cents per share bringing the total dividend for the year to 16 cents. David Hurwitz is CEO and joins us now.

David thanks so much for your time today.

DAVID Hurwitz: Thanks for having me on the show.

SIKI MGABADELI: Well you operate in the financial services sector, of course perceived to be of a higher risk that requires some specialised competencies for example and it has been historically under-served, the areas that you operate in, how have you found the trading conditions in the past year?

DAVID HURWITZ: Well we really focus in two areas, on the one hand in the financing of asset backed loans and thats predominantly in the taxi industry. The taxi industry has proved to be a very resilient industry, its completely different to the unsecured lending industry or the consumer industry where we are financing income producing assets. So in that regard weve done particularly well and you can see you highlighted our non-performing loan ratio going down which I guess is contrary to what weve seen from any other lenders, and our credit metrics have improved. And the second area that we operate, we operate as a provider of credit risk services into the large consumer credit providers in South Africa, so our clients would be the large banks and obviously the credit retailers, the municipalities, and in that area at the end of the day we are collecting from consumers. So that sector has been under some significant pressure.

SIKI MGABADELI: And you had a change in your portfolio of course and particularly from the sale of your unsecured lending and payment services businesses and I suppose David, given what weve seen happening it was a wise decision?

DAVID HURWITZ: Absolutely so we are very happy about the sale for various reasons. First of all we made a profit of about just over R600m on those two transactions and more importantly we were able to reduce the risks that the group faced and that main risk was quite frankly the risk of unsecured lending.

SIKI MGABADELI: Lets talk about that resilience you were talking about in the taxi industry and I mentioned the improvement in your non-performing loan ratiowhat do you think helps to improve that or whats behind the resilience in the sector?

DAVID HURWITZ: I really believe, well first of all from our perspective that you need specialist skills to operate in the space, so youre not just involved in financial skills such as assessing credit and collecting and mobilising capital. Its more about real specific skills that relate specifically to the taxi industry, by way of example we procure vehicles directly from the Toyota dealership channel and sell those vehicles through our own dealership and that allows us to make a profit on the vehicles that we sell as well as engage directly with our clients. We have our own insurance business which designs products specifically for the taxi operator which is relevant to him, and finally and most importantly, we have our own repair shop. So when we repossess a vehicle, we will refurbish that vehicle to a very high quality and then resell that vehicle back into the market and that then protects our losses where we get to recover more for that vehicle. So those are our core competencies but I think that what makes the taxi industry quite resilient is that whilst the South African consumer is under pressure at the end of the day his least discretionary spend is on travel. He has to get to work and learners need to get to school and university etcetera, so for that reason the taxi industry has done okay in these difficult times.

SIKI MGABADELI: So how would you then describe your specific exposure to the consumer credit environment, is it quite distant?

DAVID HURWITZ:  So certainly in the taxi space I would say it  is distantwe are financing small businesses and income producing assets and not consumption, however on the credit services side I would say that it isnt distant. We dont have capital at risk but  it becomes harder to grow earnings, because at the end of the day we are making our return out of collecting debt from the South African consumer on behalf of the large credit providers of South Africa and that is where we are seeing some strain. Despite this we grew earnings in that division quite nicely by about 9% so were quite comfortable with where we are at the moment.

SIKI MGABADELI: Youve expressed concern about the countrys financial services regulatory environment, what is the concern?

DAVID HURWITZ: So the only concern that we really expressed there is the recent amendments to the National Credit Amendment Act and specifically to a very late introduction of legislation into that act which relates to the laws of prescription. We arent particularly concerned about the actual wording of the act but just that it came in quite late and created quite a bit of confusion as to how industry should react and amend its operations for this piece of legislation. Nonetheless our business is ready for that act, the President has signed it but he hasnt enacted it yet and if it were to come into force today, operationally we would be ready for that act. From a book buying perspective because we do buy non-performing loan books, we are pricing those books as if the act is already in force and from our balance sheet perspective if that act comes into force it won’t have any impact on the value of our assets or anything like that. So we are comfortable but it did shake up the industry with quite a late change to a piece of legislation that we didnt really have time to comment on.

SIKI MGABADELI: Alright and just looking at your future plansany planned acquisitions, expansion?

DAVID HURWITZ: That does form part of our strategy, our strategy is driven by both organic growth and you see this year has been our 18% growth in headline earnings has all been organic. But part of the strategy is also to do acquisitions, weve got about R1bn to R1.2bn of spare cash available for acquisitions.these are part of the proceeds from the sale of our unsecured lending and payment services business and we would look to do acquisitions really focused in the area where we have our expertise in asset-backed lending or else in credit risk services.

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